Practice

NEW YORK -- While corporate governance in the financial services industry has improved markedly over the past year, unsettled problems such as high executive compensation and continued conflicts of interest must be rectified, a top Ernst & Young executive said last Tuesday. The resulting tightened regulation combined with heightened competition from separately managed accounts and alternative investments for high-net-worth investors, is going to mean an especially competitive landscape in the year ahead, he said.

Although the Securities and Exchange Commission had indicated it would have solutions to eradicate market timing and late trading before the year is up, the Commission is still looking at alternatives to the hard 4 p.m. close and 2% redemption fees on shares redeemed within five days. The SEC is also still looking at how to improve point-of-sale disclosure on commissions and other fees on broker-sold funds, as well as curbing soft-dollar arrangements. SEC Chairman William Donaldson made these revelations at a Securities Industry Association meeting in Boca Raton, Fla., earlier this month.

The Securities and Exchange Commission is reportedly considering shifting some of its responsibilities to the states, as the agency expects a surge of up to 15% in the number of investment advisors it oversees once the new hedge fund registration requirements become effective in February 2006.

Hedge fund Beacon Hill Asset Management and four of its top executives have settled with the Securities and Exchange Commission for $4.4 million stemming from fraud charges. In addition, the four executives have been barred from the investment advisory business. The principals -- President John Barry, CIO Thomas Daniels, Senior Portfolio Manager John Irwin and Chief Financial Officer Mark Miszkiewicz -- will pay, respectively, $1.2 million, $1.5 million, $750,000 and $400,000. Only Miszkiewicz will have the opportunity to ever be reinstated into the business, but he will not be allowed to reapply for four years.

Securities and Exchange Commission examiners are reportedly finding instances of fund managers intentionally mispricing junk bond and small-cap stock mutual fund holdings and may soon take action.

Market-timing woes continue to pervade the mutual fund industry, as even smaller shops are getting caught in the act.

A U.S. subsidiary of Dutch financial services firm ING Group indicated in an SEC filing that the NASD has made a preliminary recommendation that an enforcement action be brought against the affiliate and one of its registered agents. ING Insurance Co. of America said that ING Funds Distributor had received a notice from the regulatory agency and it has an opportunity to respond before NASD staff makes a final recommendation. At issue are three arrangements dating back to 1995, 1996 and 1998 in which the administrator to the then-Pilgrim Funds allowed frequent trading. The Pilgrim Funds later became part of the ING Funds. In September, ING said that an internal review of its mutual fund trading operation showed only isolated incidents of impropriety.

From Sarbanes-Oxley reforms to anti-money laundering rules to the USA PATRIOT Act, the rate of regulatory change within the investment management industry has dramatically increased over the last several years. Mutual fund managers now find themselves dividing their time between meeting the requirements of new laws and maintaining their primary focus of managing and growing assets.

Much as we'd like to move along to something else, we're forced by current events to end the year with yet another discussion of compliance jobs. One year ago, we had Eliot Spitzer to thank for moving the noble profession of compliance professional out of the wings and directly onto center stage. Here we go again.

Franklin Templeton Investments filed "false and misleading statements" with the Securities and Exchange Commission by not admitting to wrongdoing in settling its mutual fund case, Massachusetts Secretary of the Commonwealth William Galvin has charged.